One of the main attractions of
variable annuities
is that they offer the chance to accumulate
tax-deferred
investment earnings based on the performance of the subaccounts, or underlying investments, to which you
allocate your
annuity premium. However, because most variable annuities have higher
fees and charges than many other investments, you might have to wait
ten or fifteen years or longer before your tax-deferred variable
annuity investment provides a better return than you'd realize on a
taxable investment allocated in a similar way.
Furthermore,
if you own a taxable investment for more than a year
and then sell at a profit, any tax you owe is figured
at the long-term
capital
gains tax
rate.
Figured at 5% or 15%, depending on your tax situation,
long-term capital gains taxes are always lower than
taxes on your ordinary income. Qualified stock
dividends
are also taxed at this lower rate. But any investment
earnings in your variable annuity will be taxed at
your ordinary income tax rate, once you convert the
annuity to a stream of income and start receiving payments.
No double deferral
If you buy a variable annuity through another tax-deferred plan, such as a
401(k)
or
IRA, you'll get no additional tax benefit as the accumulating earnings are already tax deferred.
